U.S. 7-Year Notes Sell at Record Low Yield on Europe Debt Crisis

The Treasury sold $29 billion in seven-year notes at a record low auction yield amid concern of contagion from the European debt crisis, pushing investors into the safety of government debt.

The notes drew a record low auction yield of 1.415 percent, compared with a forecast of 1.446 percent in a Bloomberg News survey of 10 of the Federal Reserve’s primary dealers. The bid- to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 3.2, the highest since May and compared with an average of 2.8 for the previous 10 sales. German government bonds slid after the nation missed its maximum sales target at a bund auction by 35 percent.

“It was a very good auction, wrapping up a week of good auctions,” said Jason Rogan, director of U.S. government trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors. “There is very strong demand for Treasuries with what’s going on in Europe and with the supercommittee unable to come to a resolution at home.”

The yield on the current seven-year note fell two basis points, or 0.02 percentage point, to 1.38 percent, at 1:16 p.m. in New York, according to BGCantor Market Data. The yield on the benchmark 10-year note fell two basis points to 1.90 percent.

Bidding Details

Indirect bidders, an investor class that includes foreign central banks, purchased 39.9 percent of the notes, compared with an average of 43.7 percent for the past 10 sales.

Direct bidders, non-primary dealer investors that place their bids directly with the Treasury, purchased a record 18.9 percent of the notes, compared with an average of 9.4 percent at the last 10 auctions.

The Treasury resumed selling seven-year notes in February 2009 as it sought additional ways to raise money during the depths of the financial crisis, after having discounted the maturity in April 1993.

U.S. Debt maturing in seven to 10-years have returned 14 percent this year, outperforming a 9.3 percent return for the broader Treasury market, according to Bank of America Merrill Lynch indexes, as of yesterday.

Today’s offering is the third of three auctions of U.S. notes this week totaling $99 billion. The two-year note auction on Nov. 21 produced the highest bid-to-cover ratio on record for a fixed-coupon Treasury note or bond, 4.07, while yesterday’s five-year note sale was priced at a record low yield for the securities of 0.937 percent.

“On a scale from one to 10 all of the week’s auctions were a 10, Guggenheim Partners’ Rogan said. “And it’s because people are just that nervous.

European industrial orders declined the most in almost three years in September, led by Germany and France, a regional report showed today. Orders in the 17-nation euro region slid 6.4 percent from August, when they rose 1.4 percent, the European Union’s statistics office said.

Germany’s Bonds

Germany’s bund auction shows the nation is not immune to investors’ increasing aversion to European debt, Frank Schaeffler, a lawmaker from Chancellor Angela Merkel’s coalition said today in Berlin.

The failure of the so-called U.S. deficit reduction supercommittee to reach a deal means several tax programs, including a payroll tax holiday, risk expiring at the beginning of next year, weighing on the household spending that accounts for about 70 percent of the world’s largest economy.

“As well as the euro-region crisis, we have the U.S. supercommittee that seems to have failed and that means there will be automatic cuts in spending which will weigh on growth, playing into strong demand for Treasuries,” said Michael Markovic, a senior fixed-income strategist at Credit Suisse Group AG in Zurich.

Economic Indicators

Treasuries weakened after reports showed U.S. durable goods orders at factories fell less than forecast in October and weekly jobless claims remained lower than 400,000.

Bookings for durable goods meant to last at least three years declined 0.7 percent, less than forecast, after a 1.5 percent drop the prior month that was more than twice as large as originally reported, data from the Commerce Department showed today in Washington.

Gross domestic product climbed at a 2 percent annual rate from July through September, down from a previous estimate of 2.5 percent, the Commerce Department said yesterday.

“Expectations are still for upside into the yearend, given the uncertainties in Europe and the broader economic and policy risks risk facing the U.S.” said Ian Lyngen, a government bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “Treasuries have been, and could very well continue to be, the outperforming asset class. Yields are going to go lower.”

Treasury trading is scheduled to close worldwide tomorrow for the U.S. Thanksgiving holiday.